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Salesforce floats to end software

Salesforce floats to end software image

On 23 June, when Salesforce.com CEO Marc Benioff rang the bell to open the New York Stock Exchange on the morning of his company’s initial public offering (IPO), he might have hoped he was also sounding the death knell for the software industry – at least as we know it.

With Salesforce’s share price jumping by half by the end of that first day’s trading, investors hinted that they were thinking along the same lines.

Rather than installing customer relationship management (CRM) packages of their own, customers run Salesforce’s applications over the Internet, paying a per-user subscription fee that typically comes in at a fraction of the cost of installing a CRM package from vendors such as SAP, PeopleSoft and Siebel.

The model enables organisations to start small and scale-up as required. And for Salesforce, it provides a predictability of revenue flow that Wall Street investors like – so much so that they pumped $110 million into the company on day one of its listing.

To date, Salesforce (which cheekily grabbed the NYSE ticker symbol CRM, much to the chagrin of its would-be nemesis Siebel) sits at the top of the busiest year for technology company IPOs since 2001. For customers that have been nervous about the second wave of application service providers (ASPs) disappearing as quickly as the first, Salesforce’s instantly acquired market valuation of around $1.6 billion bestows a new legitimacy on the ASP model.

Among its priorities, Salesforce will now be looking to use its cash windfall to expand globally. Today, nine-tenths of its revenues come from the US and the company needs to expand faster into Europe and Asia/Pacific if its services are to gain appeal for multinationals. The money will also be invested in new technologies to improve existing capabilities and, perhaps, take the company into other applications beyond CRM – as planned in its original business model.

But Gartner analysts have expressed concern that the company’s sales and marketing spend at 57% of annual revenue dwarfs its research and development investment of just 7%.

Salesforce retorts that is not an unusual proportion to spend when establishing a new market. Besides, it says it is nevertheless delivering hot technology on that low budget, citing as evidence its newly released ‘Sforce’ development toolset that allows users and their developers to quickly and cheaply customise parts of their Salesforce application service.

With some CEOs labelling ASP’s second generation as “revolutionary” and the locus for a tech rebound, the Salesforce IPO certainly did have some of the glitz of the wildly successful listings that became commonplace during the dot-com era.

But, to the relief of investors and IT directors, there are differences here. A 56% first-day gain pales in comparison to the huge initial leaps of late 1990s IPOs.

Crucially, the company also showed that it has some staying power by getting into profit well before its flotation. For the first quarter of its current financial year, net income hit $437,000 on revenue of $31.1 million (albeit excluding the effects of expensing $2 million in stock options), and that followed an annual profit of $3.5 million in its fiscal 2004.

The main challenge for Salesforce – as for its ASP sector stablemates RightNow and NetSuite – is to maintain that mom-entum once pre-IPO discipline slackens.

Analysts have suggested that Salesforce’s early advantage and slim profits may not last long as competition from established companies, such as Siebel and Oracle, is stepped up. And with considerably less than one-tenth of the CRM demand currently satisfied through online services, rumours of the death of software remain, for now, greatly exaggerated.

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